The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

50 Pages Posted: 15 Aug 2015

See all articles by Nathan Foley-Fisher

Nathan Foley-Fisher

Board of Governors of the Federal Reserve System

Rodney Ramcharan

University of Southern California, Marshall School of Business

Edison Yu

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 5 versions of this paper

Date Written: August 1, 2015

Abstract

This paper investigates the impact of unconventional monetary policy on firm financing constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), which was intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms with stronger balance sheets. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier debt also rose during the MEP. Our results suggest that unconventional monetary policy may have helped to relax financing constraints and stimulate economic activity in part by affecting the pricing of risk in the bond market.

Keywords: Quantitative Easing, Unconventional Monetary Policy, Preferred Habitat, Financial Constraints

JEL Classification: G3, E5

Suggested Citation

Foley-Fisher, Nathan and Ramcharan, Rodney and Yu, Edison, The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program (August 1, 2015). FRB of Philadelphia Working Paper No. 15-30. Available at SSRN: https://ssrn.com/abstract=2643795 or http://dx.doi.org/10.2139/ssrn.2643795

Nathan Foley-Fisher

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Rodney Ramcharan

University of Southern California, Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.google.com/site/rodneyramcharan/

Edison Yu (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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